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Rating Action:

Moody's confirms Avon's rating at B1; negative outlook

16 Jan 2020

Milan, January 16, 2020 -- Moody's Investors Service ("Moody's") has today confirmed the B1 corporate family rating ("CFR") and the B1-PD probability of default rating (PDR) of Avon Products, Inc. (Avon). Concurrently, Moody's has confirmed the B3 rating on the senior unsecured notes issued by Avon and the Ba1 rating of the senior secured notes issued by Avon's wholly owned subsidiaries Avon International Operations, Inc. ("AIO") and Avon International Capital PLC (AIC). The outlook on all entities was changed to negative from ratings under review.

The rating action concludes the review process initiated by Moody's on May 28, 2019.

"The confirmation of the rating follows the closing of the acquisition of Avon by Natura & Co (Natura), and reflects Moody's expectation that the integration with Natura will accelerate the turnaround process of Avon. However, this is still subject to high execution risk, depending on the actual ability of Natura in rapidly reverting the decline in the number of Avon's representatives", says Lorenzo Re, a Moody's Vice President - Senior Analyst and lead analyst for Avon. "The rating also reflects some implicit support from Natura, who has a stronger credit profile than Avon on a stand-alone basis", Mr. Re added.

A full list of affected ratings is provided at the end of this press release.

RATINGS RATIONALE

Natura & Co, a leading international beauty and personal care products manufacturer and distributor, completed the acquisition of Avon's entire capital on 3rd January 2020 in an all share transaction. The credit profile of the combined entity is stronger than the one of Avon's because of (1) the enhanced business profile of the combined entity as one of the largest beauty companies in the world; (2) the enlarged product range, geographical reach and multi-channel distribution capabilities; and (3) stronger financial profile because of better profitability and lower leverage.

However, Avon and Natura remain independent legal entities and there is no upstream, downstream or cross debt guarantee between Avon, its parent company and the rest of Natura group. Therefore, Moody's continues to assess Avon's credit profile on a stand-alone basis, although the rating reflects some degree of implicit support from the stronger Natura group.

Moody's believes that Avon will benefit from the integration with Natura thanks to cost synergies and because of Natura's stronger track record in managing the direct selling network model. Natura's expertise should help Avon to revert the decline in the number of active representatives, which is currently the company's major challenge and Moody's expect that Avon's sales will gradually stabilize over the next 24 months. However, this recovery remains subject to significant execution risk and the continuation of the current declining sales trend would be credit negative.

The company's underlying operating profit (i.e., before restructuring and other one-off items) has been improving in 2019, thanks to the initiatives adopted under the Open-up Avon restructuring plan, including pricing and mix improvement, and reached 6.0% in the nine months ended September 2019 from 4.3% in the same period 2018. However, we expect free-cash flow to remain negative in 2019 and to be only modestly positive in 2020, owing to high restructuring costs and the cost related to the Natura integration. Moody's expects free cash flow to materially improve to approx. $130 million in 2021, as one-off costs reduce and the synergies with Natura starts to bear fruits. As a result, the company's leverage (measured as Moody's-adjusted gross debt/EBITDA) should gradually improve from the 6.2x peak in 2019 to around 5.0x in 2020 and to below 4.5x in 2021, which is well within the boundaries of the current B1 rating. However, visibility on the costs and benefits for Avon from the integration with Natura remains modest and any delay in the process could jeopardize Avon's ability to improve cash generation and reduce leverage from the current high level.

Avon's liquidity slightly improved following the early refinancing of its $386 million 2020 maturity and is currently adequate, backed by a healthy $564 million available cash as of September 2019. Following the Natura transaction, Avon does not have any RCF in place. However, we expect that Natura will provide Avon with sufficient liquidity in case of need.

Moody's has factored in the following environmental, social and governance (ESG) considerations in the rating of Avon. Because of its direct distribution model and similarly to retailers, Avon is exposed to increasing social risks because of the shift in consumer preference and spending patterns. In particular, the shift towards e-commerce that is increasing competitive pressure on other distribution channels. The long-term sustainability of direct selling model could be impacted also by other social changes, such as Increasing personal income in developing market: the direct selling model rely on the ability to attract representative with its offer of an additional income, which could become less attractive as social and economic condition improve in some markets.

In terms of governance, Avon is now a fully owned subsidiary of Natura, who adheres to high governance standards and has an history of prudent financial policy, commitment to specific leverage targets and a stated dividend policy. However, it is still unclear how the capital structure and liquidity of Avon will be managed within the Natura group. In addition, Moody's note that any aggressive financial policy, such as upstreaming cash from Avon to its parent, may hamper Avon's credit profile.

The B1 rating is supported by the strength and equity of Avon's brands and by the company's leading market position as one of the largest cosmetic producers in the world. Avon benefits from a good geographic diversification with a high concentration of operations in growing but potentially volatile developing markets.

STRUCTURAL CONSIDERATIONS

The Ba1 (LGD 2) instrument rating of the senior secured notes issued by AIO and AIC, reflects the instruments' priority position in the capital structure. The secured notes benefit from the loss absorption provided by the significant amount of unsecured debt sitting below in the structure. The security and guarantee structure of the senior secured notes include an unconditional guarantee from Avon, AIC, AIO and their restricted subsidiaries, representing approximately 85% of consolidated assets. The notes are secured by first priority liens on, and security interests in, substantially all of the assets of the AIO, AIC and the subsidiary guarantors subject to certain exceptions.

The B3 (LGD 5) instrument rating of the senior unsecured notes issued by the parent, Avon, reflect the effective subordination of these instruments to the senior secured notes.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook reflects the high execution risks on Avon's turnaround process and the uncertainty on the future financial policy and capital structure of Avon. Failure to rapidly revert the decline in the number of representative and to stabilise sales could hamper the company's ability to reduce the current high leverage, leading to downward pressure on the rating.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Positive pressure on the ratings could develop in case of 1) evidence of stronger support from Natura, such as the provision of an explicit guarantee on Avon's debt or if Avon's debt is refinanced at the parent company level; 2) successful execution of Avon's turnaround initiatives leading to material operating performance improvement, with EBIT margin approaching 10%; 3) Moody's-adjusted gross Debt/EBITDA improving to below 4.5x on a sustained basis; 4) materially positive free cash flow on a sustained basis.

The ratings could be lowered in case of 1) failure to restore operating performance, with stabilization of sales and recovery in operating margin; 2) Moody's-adjusted gross Debt/EBITDA remaining above 5.5x on a sustained basis; 3) Natura adopting financial policies that are detrimental to Avon's creditors, such as large cash upstreaming.

LIST OF AFFECTED RATINGS

..Issuer: Avon Products, Inc.

Confirmations:

....Probability of Default Rating, Confirmed at B1-PD

....Corporate Family Rating, Confirmed at B1

....Senior Unsecured Regular Bond/Debenture, Confirmed at B3

Outlook Action:

....Outlook, Changed To Negative From Ratings Under Review

..Issuer: Avon International Capital PLC

Confirmation:

....Backed Senior Secured Regular Bond/Debenture, Confirmed at Ba1

Outlook Action:

....Outlook, Changed To Negative From Ratings Under Review

..Issuer: Avon International Operations, Inc.

Confirmation:

....Senior Secured Regular Bond/Debenture, Confirmed at Ba1

Outlook Action:

....Outlook, Changed To Negative From Ratings Under Review

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Packaged Goods published in January 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Avon is a global beauty product company and one of the largest direct sellers through around five million active representatives. Avon's products are available in over 70 countries and include categories such as color cosmetics, skin care, fragrance, fashion and home. Avon generated about $5.0 billion in revenue and $380 million in EBITDA (Moody's adjusted) in the last twelve months ended September 2019.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Lorenzo Re
Vice President - Senior Analyst
Corporate Finance Group
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Ivan Palacios
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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